Earnings remain front and center this morning, with a barrage of companies blaming the strong U.S. dollar for their top-line weakness.
While the focus remains on the Q1 earnings season, the Greek drama is moving in the background towards its climax as well, with Friday’s meeting between the country and its creditors considered critical. Going by the behavior of Greek government bonds – bond yields are at multi-year highs and the yield curve inverted – the market seems to be trying to price in a default. The creditor nations and institutions led by Germany appear in no mood to give in to Greek demands, content in their understanding that a Greek default or even exit didn’t pose as catastrophic a risk as was the case a few years back.
That said, the unfolding Greek situation is nevertheless a source of uncertainty for global markets and a key contributor to the move into safer instruments like the German bunds whose yields are currently at record-low levels. Greece is obviously not the only reason why German yields are so low – they are primarily a function of the European Central Bank’s QE program. In fact, the monetary policy divergence between the ECB and the U.S. Fed is the primary reason why the U.S. dollar has been so strong lately.
The strong U.S. dollar has emerged as a big headwind for corporate profits – this was an issue the last reporting cycle as well, but the issue has really emerged as a big headwind this reporting season. Most of the big companies on this morning’s super-busy docket faced a material negative impact from the strong dollar. To name just a few of this morning’s reporting companies, DuPont (DD), United Technology (UTX) and Kimberly-Clark (KMB) had this issue — all of them beat on EPS, but missed on the top line. Travelers (TRV) missed on both the top and bottom lines, but it tried to offset the impact of its double miss through a dividend hike and bigger buyback program.
Including these reports, we now have Q1 results from 86 S&P 500 members that combined account for 24.9% of the index’s total market capitalization. Total earnings for the 86 companies are up +12.7% on +3.8% higher revenues, with 73.3% beating EPS estimates and 32.7% coming ahead of top-line expectations.
The earnings growth rate and earnings beat ratio is pretty good relative to what we have seen from the same group of companies in other recent quarters, but the revenue growth and revenue beat ratios are on the weak side. Keep in mind, however, that the strong earnings growth rate at this stage is thanks mostly to the Finance sector, which itself is a reflection of easy comparisons at Bank of America (BAC).
Revenue weakness is emerging as a key theme this earnings season. Not only is the top-line growth rate very low relative to other recent periods, but fewer companies are able to beat estimates as well.
Related podcast interview:
Sheraz Mian on Earnings and Why U.S. Investors Shouldn't Fear a Strong Dollar
